The buy-to-let sector – an overview

6 June 2018

During the 80s and 90s about 10% of households in the UK occupied homes owned by private landlords. However, in the 1990s the increased availability of mortgages to buy properties to let sparked off a growth in this type of investment, so that the number of homes in this sector rose from 2.5 million in 1999 to 4.5 million by 2016. Now about 20% of UK households live in dwellings owned by private landlords. HMRC states that there are nearly two million private landlords, of which 93% have only one property each.

Tenants tend to be younger people who have not yet achieved the desired owner-occupied status, and most (73%) are in full-time employment. Another 12% are in part-time work. There is a bias towards single-parent families.

It is fair to say that as a nation of aspirational home-owners, renting a property has always had a slight stigma, and 21% of tenants expressed dissatisfaction with their status. But there are pros and cons. Those in rented accommodation tend to be more mobile. It is easier for them to relocate to find employment than it is for owner-occupiers. Also, good news for the tenants, rent increases generally have been pegged back due to the volume of properties now available, directly as a result of the boom in the market.

This constraint on rents is one of the factors that is making the market less attractive to investors. The Bank of England estimates that the yield on private residential lets is now less than 5%, compared to 7.5% in 2001. Of course, that is still considerably greater than returns currently available on bank or building society deposits and explains why roughly one third of buy-to-let investors are retired people. As interest rates are now rising, and many of the let properties were bought on interest-only loans, it is likely that the yield will continue to fall. Investors are also adversely affected by the stagnation of house prices over the past few years.

Tax changes are also having an effect. As reported in our previous blogs, stamp duty is 3% higher on properties bought other than for one’s own occupation, mortgage interest relief at higher rate tax is being phased out and wear-and–tear allowance has been abolished. The last budget included a provision to restrict indexation allowance on capital gains realised by companies, a measure that will affect those who own their properties via limited companies.

If you are a buy-to-let investor our advice is not to rush to get out of the market but to take your time to review your portfolio and your objectives. If, like most, you have only one property could this actually be good time to acquire others, benefiting from the fact that your competitors are selling out? If you and your family are in for the long-term is now the time to consider incorporation? Above all, do nothing until you have discussed the tax implications with us.

If you are a landlord or investor, you may be interested in our Buy-to-Let seminar on Thursday 21 June. Please click here for more information.

As one of the leading firms of accountants in the North East, with offices in Newcastle, Sunderland and Jarrow, we have the expertise to advise you on a wide range of tax related issues. If you would like to speak to one of our local experts, please contact us.